Expect this to continue to be the story of the week in Canadian newspapers:
Paul Volcker, the former U.S. Federal Reserve Board chairman who’s now a key economic advisor to the White House, told U.S. lawmakers Tuesday they ought to learn from Canada’s banking system as they seek to overhaul rules governing the biggest U.S. banks.
Speaking at a hearing to tout his proposal to rein in risky investing activities by large U.S. commercial banks, Mr. Volcker said the life’s work of Canadian banks is retail banking: “That’s no longer true of great big American banks.”
With just five or six banks dominating the industry, Canada’s banks benefit from having less competition, Mr. Volcker said. “It’s a stable oligopoly.”
There’s a mixed blessing in that: fewer banks means less competition, so there’s less need for banks to compete for customers in meaningful ways. Look at the feeding frenzy once banks were allowed to buy trust companies . . . partly because trust companies were more actively competing for business. Having a “stable oligopoly” has benefits, but consumers have fewer choices on where to bank, and banks have far less pressure to lower fees or increase services.
Here’s what Americans may find the most unexpected part of the story:
Canada’s banking system also has been shielded by the fact that it has less government interference in its mortgage market, unlike in the United States, where banks have been pressured by the government to make low-cost loans to the economically disadvantaged, he said.
Mr. Volcker’s endorsement of Canada’s banking system — the only Group of Seven nation that didn’t need taxpayers to bail out its banks — came two days after The New York Times published a piece by Nobel Prize-winning economist and columnist Paul Krugman that said the United States should emulate Canada’s financial regulatory regime.
Unfortunately, the wrong lesson is likely to be drawn from this: much of the reason Canada’s banks didn’t need to be bailed out was the much lower political interference in their lending policies. Instead, US politicians are likely to insist on even more political interference to achieve the “right” result.
